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IHT implications of trustee paying trust's tax?

Settlor/trustee paying tax on behalf of trust

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We have a client who has put £325k into a discretionary trust with her three children as the trust's beneficiaries.

 

Our client & her husband are the two trustees & the money in the trust has been invested in a share portfolio.  Our client has personally paid the trust's income tax & CGT rather than using the trust's funds.

 

If our client died within 7 years of putting the money into the trust, would there be any IHT implications on the trust's taxes she has paid personally?  She has paid three years' worth so far, totalling around £15k.  Is she due this money back from the trust's funds (which would therefore increase her estate) or, as a trustee is responsible for paying a trust's tax (per HMRC's guidance), is this therefore ignored for IHT purposes on her estate?

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By MuayThai
24th Sep 2020 12:12

The tax liability is due on the trustees correct, but should be paid out of trust funds. If she is paying it personally I see this as an addition to the trust. It's a normal CLT, and IHT will be due after annual exemptions. It seems nil rate band is gone for her, is there scope to utilise NRB of the husband?

The tax paid is added property in the form of cash - added property rules relevant for 10 year charge and exit charges.

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By MuayThai
24th Sep 2020 12:45

Also are any of the children minors? If so be careful with any distributions to the kids as they will fall foul of s. 629 ittoia and she will get taxed on the income

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Replying to MuayThai:
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By Super Clive 10
24th Sep 2020 13:03

Thanks for you comments.

The children are in their twenties & thirties, so that won't be an issue.

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By Tax Dragon
24th Sep 2020 17:26

Super Clive 10 wrote:

Is she due this money back from the trust's funds...?

You tell us. Or, rather, she should tell you - did she think she was making additional settlements, or loans? Loans work better for IHT, I guess (no risk of C.L.Ts going in, no risk of late returns in relation to such C.L.Ts, and she could now take the money out IHT free and then PET it to the children); they may work less well for income tax.

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By DuncanM
28th Sep 2020 10:28

Any payment of trust expenses by your client as the settlor of the trust are either going to be loans made to the trust by the settlor, which would remain as assets in their estate subject to possible IHT on death, or they would be further sums being settled by your client on the trust, which given they have already used up their nil rate band, would be chargeable as lifetime transfers into trust subject to IHT at 20%.

Should your client die within 7 years there would also be a further charge to IHT on these chargeable lifetime transfers.

As others have stated, if these are considered further sums settled on trust, IHT returns and tax are going to be late and subject to penalty and interest. However, do not forget that you client will have an annual exempt amount available to them to reduce the amount of transfer considered chargeable to IHT, which could also include the £325,000 initially settled.

You are going to want to discuss this with your client to find out what her intention was in making these payments personally. Ideally, if these are going to be considered loans, I would also want some paperwork in place to substantiate this.

And if you or your client are wholly unaware of what the implications would have been, you may want to take some advice on how trusts work from a taxation and regulatory point of view. Trustees are under increasing obligation to comply with various money laundering and international transparency obligations, as well as obligations under the Trustee Act, and failure to comply can lead to further penalty, and exposes your client to personal risk as a trustee who is managing these funds on behalf of their children.

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By Tax Dragon
28th Sep 2020 10:40

DuncanM having revived the thread by expanding on much of what I said, I feel I should expand one bit he didn't. Repayment by Trustees of a loan is within the category of capital payments defined in s634 ITTOIA.

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